By Helen Allen.footnote [1]
Of the multiple offerings, gold custody is probably the best known. There is also provision for sterling banking, foreign currency and securities business. A common thread is the role these activities play in supporting the Bank’s mission to maintain monetary and financial stability.
The Bank of England’s services are distinct from those offered by commercial banks. As a central bank, it provides stability and continuity, including during periods of market stress. Funds held with the Bank are a direct claim on the central bank, meaning the risk of default is extremely low. Profit is not the motive for offering services and the Bank does not look to compete with commercial providers. Instead, its focus is on delivering its public mission.
Why central bank customers?
The provision of banking services to central bank customers delivers benefits that reach beyond the specific activities.
First, it supports the network of central banks. As the central bank of the United Kingdom and the main issuer of sterling, the Bank maintains strong links with other central banks and financial bodies worldwide. Banking relationships can enhance co-operation, contributing to broader working relationships. This operational network of central banks contributes to global financial stability which in turn supports the Bank’s wider financial stability objective.
Additionally, it supports reserve management activities. The Bank’s services help other central banks manage their reserves in sterling, other currencies and gold, which contributes to international financial stability. Supporting central bank customers to operate safely in sterling markets reflects sterling’s longstanding role as a global reserve currency.
Several other central banks also offer banking services to central banks; each makes its own decisions on the range of provision and its customer base. The Bank has other customers besides central banks, notably the UK Government – see Box A.
Box A: Other customers of Bank of England banking servicesfootnote [2]
The UK government. The Bank provides wholesale banking services to the Government, including acting as the Debt Management Office settlement agent for its securities activities. The Government’s retail banking services are provided by commercial banks and managed by Government Banking.
The Bank also acts as the Treasury’s agent in the day-to-day management of the Exchange Equalisation Account, which holds the UK’s reserves of gold, foreign currency assets and International Monetary Fund Special Drawing Rights.
Financial sector firms. The Bank provides banking services for certain financial sector firms, where there are clear financial stability reasons to do so. For example, to central counterparties (CCPs), in line with international standards given their importance in the financial system.
Services Provided
The Bank’s main services to central banks are set out below; all are directed at wholesale business.
Sterling accounts
A core banking service is making payments in sterling (pounds/GBP). The Bank offers customers a sterling account and payments are made through CHAPS, the UK’s high-value payment system, in which the Bank is a direct participant. Customer payments are instructed via the SWIFT global messaging network, which supports automatic ‘straight through processing’.
All customers have a sterling account, which is a requirement to access any additional service. Around a quarter of customers operating a sterling account access no other services, leaving three quarters of customers using some combination of additional services (Figure 1), as described below.
Figure 1: Services used by central bank customers (a)
Fixed term deposits
Central bank customers can deposit sterling or a range of major foreign currencies for terms ranging from one week to one year, via the Bank’s foreign exchange dealers, to earn an agreed rate of return. The Bank invests the funds generated from these ‘fixed term deposits’, subject to risk management guidelines.
Securities custody and settlement
The Bank provides services that help other central banks manage their securities activities. It is a member of two major central securities depositories (or settlement systems), CREST and Euroclear, and can act on behalf of its customers within these.footnote [3] This means central banks can hold and trade securities through the Bank, without the overheads of themselves being a direct member of each settlement system. Customers’ securities are held in segregated accounts, and the Bank manages the holdings on their behalf, including settling purchases and sales and handling redemptions.
UK government securities such as gilts and treasury bills are handled on behalf of Bank customers mostly within CREST, the securities settlement system and depository for the UK. International bonds and eligible domestic bonds of the Bank’s customers are held on their behalf in Euroclear, an International Central Securities Depository, where services also include the processing of corporate actions.
Box B: Bank of England issued foreign currency securities
The securities issued by the Bank can be purchased by central bank customers, as well as by other eligible investors. There are currently two types: foreign currency commercial paper and foreign currency bonds. Both are accessed via market intermediaries, rather than purchased directly from the Bank, and together they offer a range of maturities.
The short-term securities issued by the Bank (‘European Commercial Paper’, usually denominated in US dollars or euros, with a maturity of up to 364 days) can be bought directly from a panel of external dealers. The Bank’s regular issuance of its medium-term bonds is handled by a syndicate of banks.
Gold
The Bank of England has one of the world’s largest gold vaults, with an annual average of around 400,000 bars in custody over the last decade, representing some 60% of all gold held in London vaults. It is primarily stored on behalf of other central banks, alongside the UK’s own reserves for HM Treasury.
Gold is a significant asset in many countries’ official reserves. The Bank’s custody and trading services facilitate central banks’ reserve management, offering deep storage for customers who buy and hold gold, and by acting as a bridge to the liquidity of the London market, the global centre for gold trading. This, in turn, supports broader financial stability objectives and the international network of central banks.
Chart 1: Gold stored at the Bank of England (year end) of which HM Government holdings in orange
Footnotes
- Notes:
- (1) UK government gold holdings are available in the IMF International Liquidity (IL) dataset: Data Explorer.
- (2) Bank of England Holdings are available at: Gold statistics.
- (3) The troy ounce is the international standard used for weighing gold. A typical gold bar weighs around 400 troy ounces (12.4kg).
The Bank routinely manages physical deliveries of gold in and out of its London vault. Incoming bars are checked and weighed to ensure compliance with standardised criteria, including weight, purity, dimensions and markings.footnote [4] Gold held in the vaults does not appear on the Bank’s balance sheet; it is held on an ‘allocated’ basis. This means that customers retain legal title to the specific gold bars they have deposited, rather than having a general claim on the Bank for a certain weight of gold. Gold held at the Bank can be inspected by central bank customers for audit purposes, by selecting a sample of bars to review and weigh in a dedicated vault.
Central banks do not need physically to move their bars when making transactions with other vault customers. This is because the Bank facilitates such trading via ‘Book Entry Transfers’. Resulting ownership changes are recorded on Bank systems, using each bar’s unique number and its vault location, without moving the bars themselves. The arrangement gives central bank customers additional and efficient access to liquidity without the additional costs of physically moving the gold from the Bank’s vault. Furthermore, there is the potential to trade with those commercial firms who hold gold accounts at the Bank – a facility available to certain firms who support central banks’ access to the liquidity of the London market.
Taken together, the Bank’s arrangements support different attributes of gold in reserves management: its vault providing the secure custody required for gold as a store of value, and Book Entry Transfers facilitating gold’s use in transactions, to support portfolio management. Reflecting its central role in the gold market, the Bank continues to monitor initiatives that could support innovation, including the growing potential for digitisation and tokenisation in payment and settlement. Such developments could, in turn, support future modernisation of the Bank’s own services for central banks.
Considerations around service provision
Providing secure and resilient services to central banks requires the Bank to maintain strong customer engagement, robust risk management and governance, along with ensuring a financially sustainable approach. Together, these help the Bank maintain long-term service provision, modernise over time and build lasting customer relationships in support of its mission to maintain monetary and financial stability.
Customer engagement
A dedicated Customer Engagement team supports service delivery. Each central bank has a relationship manager, who liaises with customers on a regular basis, including holding in‑person meetings where opportunities arise. Discussion may cover how customers use the Bank’s services, ensuring awareness of facilities that match particular needs, and sharing regional insights that may impact on business. Engagement is two‑way, with customer feedback shaping how services evolve.
The Bank also conducts periodic customer surveys to assess demand, gather feedback and take soundings on interest in new or enhanced services. This can feed into future service development. It may also inform the Bank’s wider horizon scanning.
Regular newsletters update customers on services, along with prompting on relevant technical and regulatory actions. Customers periodically participate in testing for contingency work and system upgrades. Additional communications are issued as necessary, for example, when supporting the transition to the ISO20022 upgraded payment messaging standard.
Charges for each of the services are usually reviewed annually and reflect a range of factors, including investment in service provision and overall financial sustainability.
Risk management
As with any institution providing safe, confidential and reliable banking and custodial services, the Bank needs to ensure services are operated within relevant market standards and practices as well as within the Bank’s own – very low – tolerance for both financial and non-financial risk.
A key aspect of this is the observance of the highest standards of risk management and abiding by all relevant legislation. Before going ahead with any transaction, it is necessary to be satisfied that the customer has the authorisations necessary to request the transaction, that all relevant sanctions are complied with and that there is no evidence that the transaction will involve criminal activity.
Governance
Within the Bank’s organisation, provision and management of banking services to customers is centred in the Customer Banking Division, which reports to the Deputy Governor for Markets and Banking.
Looking ahead
Going forward, the Bank will continue to offer customer banking services to central banks, with the provision of reserves management capability supporting monetary and financial stability. While these services are rooted in an enduring core offering and long‑standing relationships, the diverse and evolving needs of customers are also recognised. Judgements on provision will continue to develop in response to customer requirements, as well as reflecting the Bank’s own needs and the wider environment.
Bank Insights articles do not necessarily represent the views of the Bank of England’s policy committee members.
The author would like to thank Emily Martin, Nicolas Policarpo, Frankie Romer and Thomas Vellacott for help in preparing this article, along with colleagues across Markets and Banking divisions.
For broader background on other customer groups:The Bank of England as a bank, (2014).
CREST is operated by Euroclear UK and International. Euroclear is operated by Euroclear Bank SA/NV.
The London Bullion Market Association (LBMA) specifies the Good Delivery rules for the characteristics of gold bars used in settlement in the wholesale London bullion market.